[M&A Lounge] (4) MOU? [2/2]
2020. 11. 26. THU. Los Angeles, CA.
The implementation of the MOU presupposes the binding MOU. Sometimes, the prospective Buyer pays the guarantee fee of the implementation to the Seller when entering into the MOU. In fact, it is burdensome for the prospective Buyer to pay the fee at the time the contract has not been signed and critical adverse issues may be found in the course of due diligence or whole transaction. Therefore, the guarantee fee is usually stipulated in the M&A of workout companies (when the implementation of the MOU is very essential) rather than in the general M&A.
The issues of the guarantee fee in the M&A context are related to the nature of the guarantee fee. The penalties or the liquidated damages.
In the case of the penalty, the additional damage claims are legally possible, and the court cannot reduce the amount of the penalty but only can nullify the whole or part of penalty only if the penalty is contrary to good morals and other social order. But it is not easy in practice to be nullified by the court. In this regard, since the penalty makes the strong effect of the implementation, generally the Seller wants to regard the fee as the penalty.
On the other hand, in the case of the liquidated damages, the additional damage claims are generally not possible, and the court can reduce the amount if the amount is unduly excessive. In this regard, the prospective Buyer wants to regard the fee as the liquidated damages.
There was a dispute over the nature of the MOU. The interesting facts are (1) the guarantee fee of the MOU was explicitly stipulated as the penalty, and (2) the High Court judged the fee as the penalty, but the Supreme Court judged the fee as the liquidated damages considering various circumstances. Due to the verdict of the dispute, more detailed phrase is necessary to regard the guarantee fee of the implementation of the MOU as the penalty.
The MOU I mentioned at last lounge was signed in a seller’s market where Seller’s negotiation power is very strong. Because the Seller’s will to ban the “walk away” was strong and the Seller wanted to make sure everything was cleared in early stage, the MOU was the dozens of pages and it took a almost year to be signed. However, there was no guarantee fee in the MOU.
Basically, the MOU is the product of an agreement that the parties are on the same page. I think the MOU is something that should have never be overlooked.
See you again at next Lounge.